Edgar Filing: HomeStreet, Inc.

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________

FORM 10-Q

________________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2018

Commission file number: 001-35424

________________________________

HOMESTREET, INC.

(Exact name of registrant as specified in its charter)

________________________________



Washington		91-0186600
(State or other jurisdiction of incorporation)		(IRS Employer Identification No.)

601 Union Street, Suite 2000

Seattle, Washington 98101

(Address of principal executive offices)

(Zip Code)

(206) 623-3050

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:



Large Accelerated Filer	o	Accelerated Filer	x

Non-accelerated Filer	o	Smaller Reporting Company	o

Emerging growth Company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 12(a) of the Exchange Act.			o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of outstanding shares of the registrant's common stock as of August 1, 2018 was 26,985,537.6.



PART I – FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS

Consolidated Statements of Financial Condition (Unaudited) at June 30, 2018 and December 31, 2017		4
Interim Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017		5
Interim Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Six Months Ended June 30, 2018 and 2017		6
Interim Consolidated Statements of Shareholders’ Equity (Unaudited) for the Six Months Ended June 30, 2018 and 2017		7
Interim Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2018 and 2017		8
Notes to Interim Consolidated Financial Statements (Unaudited)
Note 1 – Summary of Significant Accounting Policies		10
Note 2 – Investment Securities		12
Note 3 – Loans and Credit Quality		18
Note 4 – Deposits		36
Note 5 – Derivatives and Hedging Activities		36
Note 6 – Mortgage Banking Operations		39
Note 7 – Commitments, Guarantees and Contingencies		44
Note 8 – Fair Value Measurement		45
Note 9 – Earnings Per Share		56
Note 10 – Business Segments		56
Note 11 – Accumulated Other Comprehensive Income		58
Note 12 - Revenue		58
Note 13 - Restructuring		60
Note 14 - Subsequent events		60
ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements		61
Summary Financial Data		62
Management’s Overview of Financial Performance		65
Critical Accounting Policies and Estimates		68
Results of Operations		69
Review of Financial Condition		76
Business Segments		79
Off-Balance Sheet Arrangements		83
Enterprise Risk Management		84
Credit Risk Management		84



Liquidity and Capital Resources		89
Accounting Developments		94

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	95
ITEM 4	CONTROLS AND PROCEDURES	98
PART II – OTHER INFORMATION
ITEM 1	LEGAL PROCEEDINGS	98
ITEM 1A	RISK FACTORS	99
ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	118
ITEM 3	DEFAULTS UPON SENIOR SECURITIES	118
ITEM 4	MINE SAFETY DISCLOSURES	118
ITEM 5	OTHER INFORMATION	118
ITEM 6	EXHIBITS	119
SIGNATURES		120

Unless we state otherwise or the content otherwise requires, references in this Form 10-Q to “HomeStreet,” “we,” “our,” “us” or the “Company” refer collectively to HomeStreet, Inc., a Washington corporation, HomeStreet Bank (“Bank”), HomeStreet Capital Corporation (“HomeStreet Capital”) and other direct and indirect subsidiaries of HomeStreet, Inc.

PART I



ITEM 1 FINANCIAL STATEMENTS

HOMESTREET, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)



(in thousands, except share data)	June 30, 2018			December 31, 2017

ASSETS
Cash and cash equivalents (including interest-earning instruments of $126,083 and $30,268)	$	176,218		$	72,718
Investment securities (includes $829,422 and $846,268 carried at fair value)	907,457			904,304
Loans held for sale (includes $527,088 and $577,313 carried at fair value)	568,514			610,902
Loans held for investment (net of allowance for loan losses of $39,480 and $37,847; includes $4,187 and $5,477 carried at fair value)	4,883,310			4,506,466
Mortgage servicing rights (includes $245,744 and $258,560 carried at fair value)	272,205			284,653
Other real estate owned	752			664
Federal Home Loan Bank stock, at cost	48,157			46,639
Premises and equipment, net	99,155			104,654
Goodwill	22,564			22,564
Other assets	185,545			188,477
Total assets	$	7,163,877		$	6,742,041
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities:
Deposits	$	5,120,285		$	4,760,952
Federal Home Loan Bank advances	1,008,613			979,201
Accounts payable and other liabilities	173,145			172,234
Other borrowings	30,007			—
Long-term debt	125,368			125,274
Total liabilities	6,457,418			6,037,661
Commitments and contingencies (Note 7)
Shareholders’ equity:
Preferred stock, no par value, authorized 10,000 shares, issued and outstanding, 0 shares and 0 shares	—			—
Common stock, no par value, authorized 160,000,000 shares, issued and outstanding, 26,978,229 shares and 26,888,288 shares	511			511
Additional paid-in capital	340,723			339,009
Retained earnings	384,947			371,982
Accumulated other comprehensive loss	(19,722		)	(7,122		)
Total shareholders' equity	706,459			704,380
Total liabilities and shareholders' equity	$	7,163,877		$	6,742,041

See accompanying notes to interim consolidated financial statements (unaudited).

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)



	Three Months Ended June 30,					Six Months Ended June 30,
(in thousands, except share data)	2018		2017			2018			2017

Interest income:
Loans	$	61,409	$	51,198		$	117,345		$	100,704
Investment securities	5,527		5,419			11,086			11,051
Other	253		125			432			261
	67,189		56,742			128,863			112,016
Interest expense:
Deposits	9,562		5,867			17,350			11,490
Federal Home Loan Bank advances	4,782		2,368			8,418			4,769
Federal funds purchased and securities sold under agreements to repurchase	24		5			56			5
Long-term debt	1,662		1,514			3,246			2,993
Other	156		120			330			240
	16,186		9,874			29,400			19,497
Net interest income	51,003		46,868			99,463			92,519
Provision for credit losses	1,000		500			1,750			500
Net interest income after provision for credit losses	50,003		46,368			97,713			92,019
Noninterest income:
Net gain on loan origination and sale activities	57,049		65,908			105,368			126,189
Loan servicing income	7,032		8,764			14,606			18,003
Income from WMS Series LLC	322		406			311			591
Depositor and other retail banking fees	1,953		1,811			3,898			3,467
Insurance agency commissions	527		501			1,070			897
Gain on sale of investment securities available for sale	16		551			238			557
Other	2,490		3,067			4,729			5,765
	69,389		81,008			130,220			155,469
Noninterest expense:
Salaries and related costs	69,127		76,390			135,818			147,698
General and administrative	14,707		15,872			29,291			33,000
Amortization of core deposit intangibles	407		493			813			1,007
Legal	839		150			1,569			310
Consulting	758		771			1,635			1,829
Federal Deposit Insurance Corporation assessments	1,079		697			2,008			1,521
Occupancy	14,953		8,880			23,133			17,089
Information services	8,693		8,172			17,158			15,820
Net cost (benefit) from operation and sale of other real estate owned	2		(181		)	(91		)	(156		)
	110,565		111,244			211,334			218,118
Income before income taxes	8,827		16,132			16,599			29,370
Income tax expense	1,728		4,923			3,634			9,178
NET INCOME	$	7,099	$	11,209		$	12,965		$	20,192

Basic income per share	$	0.26	$	0.42		$	0.48		$	0.75
Diluted income per share	$	0.26	$	0.41		$	0.48		$	0.75
Basic weighted average number of shares outstanding	26,976,892		26,866,230			26,952,178			26,843,813
Diluted weighted average number of shares outstanding	27,156,329		27,084,608			27,157,664			27,071,028

See accompanying notes to interim consolidated financial statements (unaudited).

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2018			2017			2018			2017

Net income	$	7,099		$	11,209		$	12,965		$	20,192
Other comprehensive (loss) income, net of tax:
Unrealized gain (loss) on investment securities available for sale:
Unrealized holding (loss) gain arising during the period, net of tax (benefit) expense of ($642) and $1,848 for the three months ended June 30, 2018 and 2017, and ($3,300) and $2,887 for the six months ended June 30, 2018 and 2017, respectively	(2,412		)	3,431			(12,412		)	5,361
Reclassification adjustment for net gains included in net income, net of tax expense of $4 and $193 for the three months ended June 30, 2018 and 2017, and $50 and $195 for the six months ended June 30, 2018 and 2017, respectively	(12		)	(358		)	(188		)	(362		)
Other comprehensive (loss) income	(2,424		)	3,073			(12,600		)	4,999
Comprehensive income	$	4,675		$	14,282		$	365		$	25,191

See accompanying notes to interim consolidated financial statements (unaudited).

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(Unaudited)



(in thousands, except share data)	Number of shares	Common stock		Additional paid-in capital		Retained earnings		Accumulated other comprehensive income (loss)			Total

Balance, January 1, 2017	26,800,183	$	511	$	336,149	$	303,036	$	(10,412	)	$	629,284
Net income	—	—		—		20,192		—			20,192
Share-based compensation expense	—	—		1,211		—		—			1,211
Common stock issued	74,688	—		155		—		—			155
Other comprehensive income	—	—		—		—		4,999			4,999
Balance, June 30, 2017	26,874,871	$	511	$	337,515	$	323,228	$	(5,413	)	$	655,841

Balance, January 1, 2018	26,888,288	$	511	$	339,009	$	371,982	$	(7,122	)	$	704,380
Net income	—	—		—		12,965		—			12,965
Share-based compensation expense	—	—		1,460		—		—			1,460
Common stock issued	89,941	—		254		—		—			254
Other comprehensive loss	—	—		—		—		(12,600		)	(12,600		)
Balance, June 30, 2018	26,978,229	$	511	$	340,723	$	384,947	$	(19,722	)	$	706,459

See accompanying notes to interim consolidated financial statements (unaudited).

HOMESTREET, INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Six Months Ended June 30,
(in thousands)	2018			2017

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	12,965		$	20,192
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization and accretion	12,104			10,911
Provision for credit losses	1,750			500
Net fair value adjustment and gain on sale of loans held for sale	(44,297		)	(113,742		)
Fair value adjustment of loans held for investment	31			(1,203		)
Origination of mortgage servicing rights	(33,369		)	(35,211		)
Change in fair value of mortgage servicing rights	(24,878		)	21,722
Net gain on sale of investment securities	(238		)	(557		)
Net loss (gain) on sale of loans originated as held for investment	628			(297		)
Net fair value adjustment, gain on sale and provision for losses on other real estate owned	(92		)	(356		)
Loss on disposal of fixed assets	302			106
Loss on lease abandonment	5,802			502
Net deferred income tax (benefit) expense	(46		)	7,510
Share-based compensation expense	1,702			1,362
Origination of loans held for sale	(3,248,078		)	(3,665,396		)
Proceeds from sale of loans originated as held for sale	3,345,695			3,769,126
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable and other assets	3,437			(7,198		)
Increase (decrease) in accounts payable and other liabilities	2,347			(17,371		)
Net cash provided by (used in) operating activities	35,765			(9,400		)

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities	(97,842		)	(246,435		)
Proceeds from sale of investment securities	22,232			314,633
Principal repayments and maturities of investment securities	52,857			50,043
Proceeds from sale of other real estate owned	459			2,170
Proceeds from sale of loans originated as held for investment	230,527			23,780
Proceeds from sale of mortgage servicing rights	65,263			—
Mortgage servicing rights purchased from others	—			(565		)
Capital expenditures related to other real estate owned	—			(57		)
Origination of loans held for investment and principal repayments, net	(617,670		)	(420,530		)
Purchase of property and equipment	(5,926		)	(28,789		)
Net cash used in investing activities	(350,100		)	(305,750		)



	Six Months Ended June 30,
(in thousands)	2018			2017

CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in deposits, net	$	359,251		$	318,132
Proceeds from Federal Home Loan Bank advances	5,637,500			4,497,700
Repayment of Federal Home Loan Bank advances	(5,608,000		)	(4,498,700		)
Proceeds from federal funds purchased and securities sold under agreements to repurchase	796,000			326,618
Repayment of federal funds purchased and securities sold under agreements to repurchase	(796,000		)	(326,618		)
Proceeds from line of credit draws	30,000			—
Proceeds from Federal Home Loan Bank stock	98,621			91,939
Purchase of Federal Home Loan Bank stock	(100,139		)	(93,362		)
Proceeds from stock issuance, net	11			11
Payments from equity raise	—			(46		)
Net cash provided by financing activities	417,244			315,674
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH	102,909			524
Cash, cash equivalents and restricted cash, beginning of year	73,909			56,364
Cash, cash equivalents and restricted cash, end of period	176,818			56,888
Less restricted cash included in other assets	(600		)	(2,441		)
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	176,218		$	54,447
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest paid	$	28,825		$	19,757
Federal and state income taxes refunded, net	(112		)	(23,382		)
Non-cash activities:
Loans held for investment foreclosed and transferred to other real estate owned	455			1,125
Loans transferred from held for investment to held for sale	252,567			113,278
Loans transferred from held for sale to held for investment	10,480			29,809
Ginnie Mae loans recognized with the right to repurchase (reduction in), net	1,992			(2,358		)
Receivable from sale of mortgage servicing rights	3,457